3. Greenwashing through Misconception
This category represents the most prevalent and yet least comprehended form of greenwashing. It arises from a significant "disconnect" that has emerged between the financial community and end customers (individual investors or pension fund beneficiaries) over the past decade, coinciding with the rise of ESG. Banks have frequently presented ESG ratings to their clients as a measure of sustainability. In essence, the notion has been conveyed that a company with a high ESG score equates to a sustainable company, and consequently, an ESG fund equates to a sustainable fund. Unfortunately, this perception is flawed.
ESG approaches were never designed to assess a company's environmental impact. On the contrary, their primary objective is to evaluate the potential impacts that the environment could have on the company. These approaches serve as risk management tools developed by investment specialists for investment specialists. Therefore, the ESG approach aims to determine whether investing in a company like Coca-Cola, for example, is advantageous for the investor, rather than assessing its impact on the planet, which is the realm of impact measurement.
This is why Coca-Cola receives an AAA rating in MSCI's ESG rating system, the leading global provider of ESG data. MSCI's analysis indicates that Coca-Cola does not pose a risk to the investor in terms of governance, environmental, and social factors. However, this does not imply that Coca-Cola, one of the world's largest contributors to plastic pollution and obesity, can be deemed an AAA-rated company when it comes to promoting environmental or social improvements.
This confusion has been perpetuated by the banking sector over the past fifteen years, often due to bankers' lack of understanding rather than a deliberate attempt to mislead their clients. Many professionals in the industry still believe that ESG equates to sustainability and continue to endorse ESG funds as sustainable solutions. However, end clients, who find companies like Coca-Cola or Shell listed as "ESG leaders" in their portfolios, understandably struggle to comprehend how these companies contribute to a greener and more equitable planet. It is now crucial to instill rigor within the industry and develop impact products alongside ESG products, as these are the types of products that clients are currently seeking.